AIG Pay, Again

New York magazine has a piece on the pay disputes at AIG which sums up, I think, the core of our dilemma with the financial bailouts. To wit: the traders at AIG are threatening to walk if Ken Feinberg pays them what he says he's going to pay them, particularly if the company tries too hard to withhold the retention bonuses they were promised in order to stay on board and clean up the mess. Ken Feinberg is holding firm.

The company is scheduled to pay another $198 million in retention payments to some 240 remaining FP employees in March 2010. Right now, according to AIG executives and Treasury sources close to the talks, the issue is that Feinberg wants FP's traders to return the rest of the retention money that was pledged to be returned in March of this year under pressure from Cuomo. FP executives say the contracts are outside Feinberg's jurisdiction. Feinberg counters that he could use the contracts as a factor when determining a trader's base salary for next year as indicated in the statute set by Congress. In theory, if an FP employee is due to receive $1 million on March 15, 2010, Feinberg has the authority to compensate by cutting their salary to $1. Of course then, the employee could simply quit.

Senior AIG executives contend that an exodus of traders over punitively reduced contracts risks blowing up the $1.1 trillion derivatives portfolio still left to be unwound, destroying the taxpayers' $180 billion investment in the company and potentially dragging the fragile economic recovery back into the abyss. "I'm trying desperately to prevent an uncontrolled collapse of that business," then-CEO Ed Liddy testified last March. "The financial downside for taxpayers is potentially very large and it's very real." The AIG executives see Feinberg's efforts to save a few million in retention payments, given the billions at stake, as a terrible business decision. "I just don't understand why you would treat people this way," one AIG executive says. "It's economic and financial terrorism on the government's own investment, by the government."

Feinberg, along with everyone in the Obama White House, recognizes the risks. "I'm concerned about that. I don't want to see that happen," Feinberg said as we pulled up to Lincoln Center. But privately, Feinberg has indicated to Treasury officials that he's not sure the FP employees are as crucial as they say. When the crisis erupted last fall, AIG hired McKinsey and Blackstone to study the portfolio and devise a strategy to wind down the trades. If a mass of FP traders leave, advisers might be able to stabilize the positions in time to bring in new traders. "You could triage it," a former senior FP trader told me. Essentially, as long as someone managed risks to interest-rate and foreign- exchange moves, traders could be hired to continue the unwind.

"Might" is not really a word I want to hear when I contemplate the $180 billion of which I own a 1/300000000 share.

The question that neither I, nor (as far as I can tell) the regulators, have a good handle on, is how good a trader you need to unwind these positions. If it can be done by any kid out of business school, then Ken Feinberg is right, and the government should pressure them to give the money back. If it needs some expertise, then we're kind of in trouble, because no one with any qualifications beyond a pulse would want these jobs. Going to work for AIG means, apparently, that you cannot write a valid employment contract, since the government feels free to rip it up any time their polls dip. I wouldn't take this job, and I make considerably less than $500,000 a year, plus I'm manifestly unqualified.

Any attempt to decipher the truth of the case is further complicated by the fact that, at this point, the government is not trying to maximize the amount of money we recover from AIG; it's trying to minimize the political fallout from the various banker scandals. It might be less politically costly to spend billions on an AIG collapse than to allow the fine folks in Financial Products to take home $100 million.